A lawsuit over allegedly illegal campaign-finance activities by the Building Industry Association of Washington is headed into a long court battle.

State lawyers offered to settle their lawsuit against the association over campaign-finance violations from 2008, provided that builders paid fines and state costs of $900,000.

The offer, which expired last month, would have been the second-largest such sanction in state history, just shy of one dealing with the Washington Education Association. The BIAW rejected it, calling the offer “nothing more than extortion.”

The BIAW countered with an offer to pay $10,000 and continues to deny it broke state law or that its Member Services Corp. should be considered a political committee. Builders also hired Washington, D.C.-based campaign-finance lawyer Cleta Mitchell as they prepare for a trial that’s scheduled to start Jan. 11.

At issue is $582,000 collected by the Member Services Corp. in 2007 for use by the builders’ political committee to promote Dino Rossi’s campaign for governor in 2008. The money came from local builder groups that agreed to set aside a portion of their insurance premium refunds from the state “Retro” program that the BIAW manages for members.

The money’s existence was not reported to the public until August 2008, drawing a formal complaint from two retired Supreme Court justices, Faith Ireland and Robert Utter, who criticized the secret fundraising. The money was one piece of the more than $7 million that the BIAW’s ChangePAC spent in the governor’s race to promote Republican Rossi and attack Democratic Gov. Chris Gregoire, the eventual winner.

The Attorney General’s Office says the BIAW actions were a serious violation, and it alleges that the builders should have registered their Member Services unit as a political committee and reported the funds sooner.

The alleged violations involved insurance rebate funds that the BIAW handles on behalf of 6,000 of its members who participate in the state’s “Retro,” or retrospective, rating insurance program. “Retro” rewards companies that have lower than average claims costs for worker injuries.

“We vigorously defend our laws requiring open government and accountability. And this case is part of that commitment,” AG spokeswoman Janelle Guthrie said Wednesday, denying claims by the BIAW that it was being politically persecuted.

BIAW spokeswoman Erin Shannon accused Attorney General Rob McKenna, a Republican, of trying to win points politically by taking a hard stand against the builders, whom he has relied on in the past for support. In fact, Democratic attorney general candidate John Ladenburg urged McKenna last year to refer the case to someone else because of the BIAW’s past support.

Guthrie said McKenna is not directly involved in the case.

“As he does with any cases, he is monitoring this through our chief deputy, Brian Moran. For the case specific decisions he relies on the expert judgment of the attorneys involved,” she said.

Guthrie also contended that the BIAW is not responding to discovery requests related to the suit. But Shannon said builders have turned over “thousands of documents,” and she complained the state is going overboard with excessive requests for material far beyond the scope of the actual Member Services Corp.’s handling of funds.

The PDC, which has jurisdiction over campaign-finance disclosure and violations of the law, first investigated a complaint about the BIAW’s actions last fall, after the former Supreme Court justices and others filed complaints about the money trail.

The PDC then turned the matter over to the Attorney General’s Office for further investigation and possible filing of a lawsuit to seek damages that would exceed the PDC’s authority.

The settlement offer made Aug. 25 came to light when the BIAW staffers wrote about it on the association’s blog and also in its September issue of Building Insight, which is being distributed this week.

Knoll Lowney, the Seattle lawyer who filed the complaint for the justices, said his group has seen “just a little bit of the evidence, and it suggested that it amounts to a conspiracy to break the laws. Given that, I’m not totally surprised that the state, which has seen all the evidence, thinks it’s a very serious case.’’